Going cashless: What’s good for banks may not be best for you

There are some things you can only pay for with cash – or at least there used to be.

Forgot quarters for the parking meter? No worries – a growing number of cities now offer automated machines that take credit cards or applications allowing consumers to pay using their smartphones.

Need a couple of dollars for a highway or bridge toll? Not with an E-Z Pass or similar electronic collection system, which deducts money from your prepaid account the minute you pass through the gate. Even many street vendors now have credit card readers that attach to their smartphones or tablets.

Through these and other technological innovations, it seems that the reasons consumers once had to always carry around a few dollars are disappearing. In fact, many bankers, economists and random people trying to prove a point have shown that they could go cashless for days. But is the United States on the whole ready to become a cashless society?

Most observers seem to think that while the technology is in place for a life without actual currency, society has a long way to go before all payments are cashless. “It’s not out of the realm of possibility. It won’t happen tomorrow, but I do see the country moving in the direction of non-cash payments,” says Shawndra Hill, a Wharton operations and information management professor.

Privacy concerns over banks’ or retailers’ ability to obtain purchase or personal information is one of the main reasons that consumers are resistant to going cashless, Hill notes. “Many people… do not want to have every move documented,” she says. Ron Shevlin, a senior analyst the Boston-based Aite Group, adds that demographics are another reason cash will remain viable over the long-term. “A good number of senior citizens are not giving up cash, and a huge portion of baby boomers are not giving it up either.”

Indeed, consumers of all ages are actually seeking out more cash than in past years. According to the most recent ATM volume data from the Federal Reserve, in 2009 consumers withdrew $629 billion from ATMs, up nearly 3% from 2006. The Federal Reserve also reports that credit card usage is on the decline. In 2011, consumers had $803.8 billion of “revolving credit,” mostly in the form of credit cards, down nearly 15% from 2007. But some of the statistics could be attributed to consumers trying to tighten their belts and cut back on debt as a result of the economic downturn.

While a completely cashless society may be far off, experts do foresee the use of currency decreasing in next few years. In fact, the use of cash is predicted to decline 3% a year until 2015, according to the 2010 Aite Group report, “The Less-Cash Society: Forecasting Cash Usage in the United States”.

The consumer conundrum

Convenience is arguably the biggest benefit to consumers when it comes to going cashless. No longer do they need to seek out a bank branch or ATM before going shopping. In fact, mobile payment applications have made it possible to complete a purchase without even having a credit card on hand. And paying with a card or smartphone comes with the convenience of having an electronic record of the transaction.

But consumers often pay the price for such advantages. For one, there is greater temptation to overspend with a credit card since all purchases are “buy now, pay later”. Additionally, stealing credit card or debit information is much simpler than taking cash from a person. “Your statement comes through every month, and you must examine it every month because you are always at risk of losing your credit card or someone getting your credit card number,” says Jack Guttentag, a Wharton professor emeritus of international banking.